Government Promotes "Buying and Selling" to Control Long-Term Interest Rates
As global attention focuses on U.S. debt risks, Japan is quietly approaching its own fiscal cliff. To curb upward pressure on long-term interest rates and stabilize market confidence, the Japanese government is implementing a new policy: encouraging domestic holding of Japanese government bonds.
A draft economic policy guideline disclosed by Reuters indicates that this move aims to alleviate market unease caused by the recent surge in ultra-long-term government bond yields and to maintain the medium-term fiscal target set in 2018, which envisages achieving a basic budget surplus by fiscal year 2025 at the earliest.
Although the draft continues the path of fiscal discipline, the timetable for budget balance may face delays due to uncertainties from U.S. tariff hikes. Moreover, Japan will reduce the issuance of ultra-long-term government bonds to ease concerns about worsening debt.
Once reviewed by the ruling party, the policy blueprint is expected to be officially finalized this month.
Ueda Sees Economic Growth, Signals Further Rate Hikes
Bank of Japan Governor Kazuo Ueda stated on Tuesday that despite uncertainties from a new round of U.S. tariffs on Asian countries, Japan's economy has sufficient resilience to handle the impact. He believes that high corporate profits and a robust labor market can offset risks posed by a slowdown in exports and investments.
Ueda noted that although inflation has temporarily decreased, it is expected to stabilize above the 2% target driven by tight labor conditions. He reiterated that as long as economic and price trends confirm an upward trajectory, the central bank will be prepared to continue raising rates.
It's noteworthy that Japan's economy contracted in the first quarter, and April's export growth slowed, highlighting the pressure from changing trade policies on Japan's recovery. Consequently, the Bank of Japan revised down its economic and inflation forecasts in May and stated it would proceed cautiously with monetary policy normalization.
Bond Purchase Plan Pace in Focus, Central Bank Seeks Steady Progress
The Bank of Japan ended its previous bond purchase plan in March and is set to hold its next policy meeting in mid-June to evaluate the new purchase cycle arrangements for 2026.
Based on recent communications with market participants, the central bank may continue its current pace of reduction while seeking a balance between flexibility and market predictability. Officials suggest lowering the bond purchase scale to 1-2 trillion yen per month after fiscal year 2026.
The central bank emphasizes that although the overall inflation rate reached 4.6% in April, food price pressures are expected to ease. Core inflation, excluding food and energy, remains below the target but may rise in the coming quarters, prompting the bank to closely monitor trends to determine the pace of rate hikes.
U.S. and Japan Mull Missile Defense Cooperation, "Golden Dome" as Bargaining Chip
Meanwhile, U.S. President Trump is seeking Japan's participation in its next-generation missile defense project, the "Golden Dome." According to Nikkei News, Trump has proposed cooperation to Japanese Prime Minister Shigeru Ishiba, with the project expected to require $175 billion in total investment to counter future aerial threats.
If Japan participates in this plan, it may gain some leverage in the ongoing U.S.-Japan tariff negotiations. Analysts indicate that cooperation on security technology could serve as a new breakthrough in deepening strategic relations between the U.S. and Japan.
Trump has appointed U.S. Space Force General Michael Gate Line to lead the project, expecting to showcase phased results by 2029. However, the U.S. Congressional Budget Office warns that the project may take 20 years and exceed a total cost of $800 billion.
Policy Meetings and Data Risks Coexist, Market Focuses on U.S. Signals
On Wednesday, June 4th, no significant Japanese economic data is scheduled for release, shifting market focus to U.S. ADP employment data released that evening, ISM services PMI, and the Federal Reserve's Beige Book the following morning. These overseas indicators could bring short-term volatility to the yen exchange rate and bond market trends.
Overall, Japan is addressing multiple challenges through a combination of fiscal adjustments and monetary policy. Maintaining policy flexibility and initiative amid external shocks and internal inflation is of utmost importance.
